By way of clarification, before we begin, a "Special Needs Trust" is essentially a component of an estate plan which allows the creator(s) to distribute their estate to a special needs beneficiary upon death in a manner that will best provide for that beneficiary in light of their own abilities and income / asset restrictions tied to any government aide that they may be receiving or hope to receive in the future. Although the principles discussed herein translate somewhat to special needs trusts created by an individual for their own benefit (self-settled special needs trusts) or money gifted to a trust during the giver's life to provide for another immediately (third-party special needs trusts), this article seeks to address standard special needs trusts as described above.
- A special needs beneficiary that is dependent on income-sensitive government assistance can be immediately disqualified for inheriting property above the allowed amount, and even after expending the inheritance, such beneficiary would need to reapply for benefits.
- Some programs require that recipient reimburse the program for expenses incurred. For example, a Medi-Cal recipient having received $50,000 in benefits would likely need to turn over $50,000 of an inheritance back to the state.
- A beneficiary who is susceptible to making poor decisions with their resources as a result of their disability will be placed in charge of a potentially large inheritance, placing them in a likely scenario of making decisions which would result in a partial or complete loss of such inheritance.
- A beneficiary may be under the care of an individual who may not be one who could be trusted to manage the financial affairs of such beneficiary, and poor planning could result in that individual having direct asset to the beneficiary's inheritance (or any other caretaker for that matter).
The best way to think of special needs planning as it relates to trusts is to consider the potential problems as described above, and recognize the need to scale back in the autonomy of the trustee and the availability of the funds to the beneficiary--to work with the bounds the situation has defined. A Special Needs Trust differs from a standard trust in the following respects:
- The trust never dictates that the beneficiary has any right to the property, but rather makes the funds available to the beneficiary at the discretion of the trustee. Without the unfettered right to receive the property, and without the right to assign or borrow against his/her inheritance, no creditors or judgment holders have a right to collect or lien any property of the beneificiary.
- The trust binds the trustee to use the trust assets to supplement and not replace any public benefits that he/she may be receiving.
- The trust allows the trustee to unilaterally (to the extent provided by law) apply for public benefits, and to create another trust, and manage those benefits in conjunction with the special needs trust assets.
- The trust allows the trustee to terminate the special needs trust in a situation where the funds are to be lost to creditors of the beneficiary (which they should not be in the first place, but should such creditors be successful in forcing otherwise), and in situations where the beneficiary would be disqualified from public care and benefits.
- The trust provides for alternative distribution in situations where the special needs beneficiary does not receive distribution (death, termination of trust, etc.)
- And more . . .
It is logical to assume that an inheritance can do nothing but benefit, and be an improvement in one's life, but only those who care for special needs individuals know that coming into a large sum, or unexpected amount of money can cause exponentially more harm than good. A properly drafted Special Needs Trust will ensure that one's legacy will be used to benefit and enrich the life of their special needs beneficiary in the greatest manner possible.
Logistically, the Special Needs Trust is a separate trust with its own trustee and provisions. When drafting the primary living trust, the creators simply name the Special Needs Trust as the outright beneficiary of the inheritance in place of the actual beneficiary, and the Special Needs Trust and trustee take over to provide for the highest standard of living as the circumstance allows.
I found it very difficult to synthesize this vast area of law into one post, so rest assured more will be forthcoming, but please do not hesitate to contact me should you have any additional questions.